Nils Kok

22 February 2012 – According to finance and real estate academic Nils Kok a decade ago, the green building movement didn’t exist. Today, despite two global financial crises, green buildings are a growing market and increasing at “phenomenal speed”, he says.

In 2011, Dr Kok, who is associate professor in finance and real estate at Maastricht University in The Netherlands, co-authored the Building Better Returns research report along with Graeme Newell and John McFarlane of University of Western Sydney, on behalf of the Australian Property Institute and the Property Funds Association of Australia. This was the first major study in Australia to assess the value of “green” in the financial performance of office buildings.

He will discuss his findings at the Green Cities 2012 conference in 5-6 March in Sydney.

The following question and answer article will be published by the Green Building Council of Australia’s Evolution Magazine for the conference.

Question: The Building Better Returns report finds that Green Star-rated buildings are delivering a 12 per cent green premium in value and a 5 per cent premium in rent.  Did this finding surprise you?

Nils Kok: These results were not particularly surprising, as they are comparable to what we are seeing in the United States, and to some extent in European markets. The results indicate two things: that there is a value difference between green and non-green buildings and how tenants perceive these buildings; and that there may be a lack of supply of certified green buildings.

Moving forward, we will most likely see an increase in green certified buildings, leading to an increase in supply. While this may result in reductions in green premiums, expect to see discounts for non-certified buildings.

This report adds significant weight to a growing body of evidence demonstrating that green rated buildings realise higher values.  If the evidence is there, why are some construction companies not yet building green?

While we now have evidence that non-certified buildings are beginning to suffer in the marketplace, developers need more integrated design and construction teams to deliver green buildings – and this is challenging for companies that have been building in the same way for 30 years.

Certainly, some elements of the real estate sector are being myopic and resistant to change.  In the short term, the increasing focus on green building will have little impact on their businesses. In the medium term, however, as tenants and investors increasingly base their decisions on the sustainability of buildings, the landscape will start to look different and developers that don’t construct according to the latest green standards will be left behind.

Where do you think is the tipping point that will make the property and construction industry treat green building as “business as usual”, and tenants demand green buildings as a matter of course?

I think we’re close to the tipping point now, especially in new construction. If you look at what is happening in the US, green buildings represent around 25 per cent of new construction. The challenge is really in addressing existing buildings. In Australian markets where the government is a large tenant, we’re nearing the tipping point earlier than in some other commercial markets.

Despite the second global downturn that we’re currently facing, I’m certainly not pessimistic about the future of green building. When we look at where the industry was a decade ago, the green building movement didn’t really exist. In the last few years, notwithstanding two global financial crises, the interest in green building and market expansion is still increasing at a phenomenal speed. The fundamentals haven’t changed: resources are still scarce and expensive, no doubt that green building is here to stay.

Do you think we are beginning to evolve our thinking from the notion that green-rated buildings deliver green premiums, and towards an understanding that non-green buildings require “brown” discounts?

There is a definitely a value divergence based on energy efficiency and sustainability. This can be presented in two ways – either as a green premium or a brown discount. It’s effectively the same thing. The bottom line is this: while sustainability is not and will not be the number one consideration, sustainability is increasingly being factored into the pricing and valuation of real estate.

Nils Kok during a presentation on Building Better Returns

What do you think the future holds for green building both in Australia and around the world?

As mentioned by Thomas Friedman, the word “green” should start to disappear from the real estate language, as green becomes more mainstream. As this happens, the focus on individual components of green will become more important and buildings will compete not just on energy efficiency, but on water efficiency, material use, and indoor environment quality (IEQ) and its relation to productivity.

As a result, rating tools will need to adapt to award stars for the whole spectrum – moving from black to green or 0 to 6 – so that investors and tenants can better understand the performance of the buildings that they own or occupy.

What do you predict will be the next areas of focus for green building research?  How will this affect the perception and reality of green buildings in the marketplace?

The research into building values has raised a lot of more complex questions. For example, what happens to the tenants after you retrofit a building? Are they more likely to stay on? What components of sustainability matter most to tenants? Is water efficiency important? How does IEQ fare?

We need to monitor buildings to see how they perform over time from a financial perspective. Importantly, investors need to realise that buildings are becoming more flexible in their purpose, driven by changing work habits. And buildings will increasingly be used as generators of energy, working with utilities to stabilise the grid. The building of the future will be much more connected.